Some states prohibit indemnity clauses in construction contracts that attempt to absolve a contractor for its own negligence. 

In 2008, the Georgia Supreme Court struck down a limitation of liability clause under Georgia's anti-indemnity statute in Lanier at McEver, L.P. v. Planners and Engineers Collaborative, Inc.¸ 663 S.E.2d 240 (Ga. 2008).  The facts were that a developer retained an engineering firm and paid it $81,514 to design a storm-water drainage system for a 220-unit apartment complex.  The clause at issue stated:

In recognition of the relative risks and benefits of the project both to [the developer] and [the engineer], the risks have been allocated such that [the developer] agrees, to the fullest extent permitted by law, to limit the liability of [the engineer] . . . to [the developer] and to . . . any third parties for any and all claims, losses, costs, damages of any nature whatsoever . . . so that the total aggregate liability of [the engineer] . . . to all those named shall not exceed [the engineer’s] total fee for services rendered on this project." 

After the apartment building was completed, the developer discovered erosion and other physical damage that the developer’s expert witness attributed to the engineer’s negligent design of the storm-water drainage system.  The developer claimed that it spent $250,000 for partial repairs and expected to spend $500,000 in total to complete the repairs.  The developer sued the engineer for negligent construction, breach of warranty, and litigation expenses.  The engineer responded by trying to invoke the parties' limitation of liability clause to cap the developer's damages at the engineer's fee of $81,514. 

Ultimately, the Georgia Supreme Court determined that the clause violated a state law, which prohibited indemnification in a construction contract for liability for bodily injury or property damage resulting from the sole negligence of the promisee (or contractor).  The court reasoned: 

This is because the clause applies to “any and all claims” by third parties and shifts all liability above the fee for services to the developer no matter the origin of the claim or who is at fault.  Thus, while a third party is not precluded from suing [the engineer] for any negligent actions in constructing the storm-water drainage system, the clause at issue here allows [the engineer] to recover any judgment amount entered against it from [the developer] once the $80,514 threshold has been surpassed, including judgment amounts on third party claims for which [the engineer] is solely negligent.” 

So even though there were no actual third party claimants and the word “indemnity” did not appear in the contract, the court held that theoretically the developer’s damages of $250,000 already incurred exceeded the $80,514 threshold so that the developer would be liable to the engineer for all future third party claims.  Similarly, on November 21, 2011, the Georgia Supreme Court again struck an indemnity provision in Kennedy Development Co., Inc. v. Camp, et al., 2011 WL 5830482 (Ga. Nov. 21, 2011), where the court invalidated an indemnification clause within an assignment and assumption agreement transferring responsibility for the management and operation of a newly developed subdivision to its homeowners’ association.   

However, removing the third party language in the limitation of liability clause avoided the Georgia anti-indemnity statute in RSN Properties, Inc. v. Engineering Consulting Services, Ltd., 686 S.E.2d 853 (Ga. Ct. App. 2009).  There, the developer hired an engineer for the sum of $2,200 to perform soil studies and to render a professional engineering opinion on the suitability of using septic systems in a residential subdivision.  The developer sued the engineer for breach of contract and negligence for concluding that most of the lots were suitable for septic systems when they were not.  The developer claimed it relied on the inaccurate opinion to complete road and waterline construction in order to obtain county approval of the development.  The county refused to approve the development of many of the lots resulting in damages to the developer of more than $100,000. 

The engineer moved for summary judgment on the basis of the limitation of liability provision, which stated:

[The developer] agrees to limit [the engineer’s] liability to [the developer] arising from [the engineer’s] professional acts, errors or omissions . . . such that the total aggregate liability of [the engineer] to [the developer] shall not exceed $50,000 or the value of services rendered, whichever is greater.” 

The Georgia Court of Appeals upheld the provision because the parties were in relatively equal bargaining position in a commercial setting, the provision reflected an arms-length bargain to perform the service at the agreed-upon fee in return for a liability cap and did not release the engineer for its liability, and “nothing in the contract exculpates, holds harmless, or otherwise limits [the engineer’s] liability to third parties.” 

The takeaway from these cases is that you must determine whether your state (or the state where you will be performing your work if it is not in your state) has an anti-indemnity statute and how the courts interpret limitation of liability clauses before you sign your contract.  By including tested provisions, you can limit your liabilities.